Ask HN: Don't understand vesting/ownership offer, how do I make money off it?

7 points by giltleaf 10 years ago | 9 comments

Brief: If I am offered vested ownership of a company, how do I eventually make money off of that?

I am being offered a job where I start out with .25% ownership to increase to 2% in 3 years. Salary will shoot up along with that and I'm confident I can get both of those things in writing.

My question is, when I'm at the point where I own 2%, how do I make money off of that? The company wants right of first refusal (which is a concept I understand), but what if nobody wants to buy the stock? I don't know that they will go public, so who do I even sell it to at that point? Does that make it essentially worthless?

Are there any good blogs or websites that can help me get a handle of these things better?

jacksondeane 10 years ago |

Long story short... you will likely need a liquidity event for your shares to be sold for cash.

This could be though an acquisition, IPO, or the board deciding to let you sell your shares (usually back to the company via the right of first refusal).

Your shares are sort of "worthless" until one of these events, that is the risk you take by allowing some of your compensation to be delivered in private stock.

The good news is they are offering you a .25% vested stake and a shorter-than-normal vesting period of 3 years. Once those shares vest they are yours forever, or until you sell. If you decide to leave the company there is a chance they will offer to buy you out of your vested shares, that is where you can make some cash.

brianwawok 10 years ago | |

Yup. So basically value your ownership as 0 to at most $10k. If the salary and job title make sense, do it. If the pay is 50% of market rate, don't do it.

giltleaf 10 years ago | |

Thanks for the insight into the competitiveness of the terms. 99% sure there won't be an IPO for this company so I would need to ask him about his plans to sell or dividends I believe.

Felixia12 10 years ago | |

Party poker

jtfairbank 10 years ago |

jacksondeane has a great answer if you're at a traditional startup who's goal is acquisition or IPO.

Not all small businesses are startups though. If you are working for a lifestyle business, or even a larger company that has relatively slow but steady growth, then the board may decide to issue dividends.

It's important to remember: your equity is worthless, but so is everyone else's. If you trust the company leadership and they aren't just using this as a way to get cheap labor (i.e. they will pay dividends, buy back your stock later, get acquired, or IPO) then it could be a good deal.

My recommendation: if the company isn't a traditional startup and offers fair pay (or will increase compensation down the road if they are early stage now), then add some terms that require the company to buy back your vested shares when you leave. You can set a predetermined price (like 2x the current value), or base it on milestones (time you spent there, revenue milestones, etc). Just make sure that you don't have to sell at that value if they are worth more- you can always hang on to them, negotiate a higher price with the company, or sell them to someone else.

giltleaf 10 years ago | |

Thank you very much, that makes a lot of sense. It seems like I would want to angle for dividends or the terms that would require the company to buy back the vested shares. It sounds like that might be something I need a lawyer for, but just in case, do you think there are common terms or templates for that?

I also really liked the framework of "your shares are worthless, but so is everyone else's." So aligning my interests with the founder seems like a good way to go.

jtfairbank 10 years ago | | |

Yup, always make sure the incentives are aligned. Unfortunately this is a pretty unique situation. For startups the usual is to angle for an IPO, or failing that go for an acquisition. This shared goal and payoff event naturally aligns the interests of employees and management.

For your situation, you'd definitely need your own lawyer to review the documents. Perhaps you can get the company's lawyer to add those terms in though, to save some initial cash? I'd go for one of the following:

* Required stock buyback when you leave at 2-4x the current value, or based on the last 409A valuation if that is higher. They should be doing that once a year for legal reasons, if they do any equity or stock option grants.

* Minimum yearly dividend to be paid to all shareholders based on a % of revenue (not profit). This one is nice because it's egalitarian. Building it into revenue protects you, and they can just consider it a cost-of-doing-business overhead.

* [in addition to the above] Have them come up with a set compensation plan that applies equally to everyone (including them) based on role, years with the company, and level of expertise (junior, normal, senior). This should be public internally, and there should be no bonuses or additional compensation beyond what it specifies. The plan can be re-evaluated wholistically based on runway left and revenue milestones, but it'd be good to note down what those milestones are ahead of time. Unfortunately you probably can't get that in a contract, but it'd show a lot of trust and goodwill on management's part if they implement it as part of company policy.

Honestly this situation sounds a bit tricky if you don't have a strong history with these guys, or they don't have a track record of building a small business that pays dividends or otherwise compensates equity holding employees. A worse case for you is no liquidity event or dividends, but management pulls money out of the company for bonuses for themselves.

That being said, this could be a great opportunity for you. Forget the SV big or bust mentality, there's a lot of pluses to working at a stable slower growing business. Less pressure, more flexibility with your time, a closer knit team that won't double every year or two.

Best of luck mate!

loumf 10 years ago |

Ask the owners: "Can you tell me how I make money off this equity?"

Possible answers (not exhaustive):

1. We plan to exit

2. We plan to pay dividends

3. We plan to build and support a private market

4. We plan to institute a buy-back program with the valuation based on some objective criteria (FMV / x revenue multiple / x profit multiple)

In all cases, the thing you want is that the owners make money off of the stock in the same way you do and that they have the same class as you.

giltleaf 10 years ago | |

I just wrote all of those down to ask when we get back to the table. Thank you very much - sometimes the forward question is the best question.